It’s a question occupying many in the energy industry – and the public. Will Australia reach 82% renewables by 2030?
When Peter Lambert of McKinsey & Company addressed Australian Energy Week in 2023, he delivered the sobering news that it wasn’t likely.
But things change. At this year’s event, McKinsey & Company Partner Victor Finkel said he’s “tremendously optimistic” – given the necessary acceleration.
Over the last 12 months, a “huge” uptick in action by private companies and government has boosted business viability for renewables and storage.
McKinsey & Company partnered with the Business Council of Australia to assess sectoral pathways to 2030 and 2035.
Here’s what the numbers say.
We are making good progress, but the bar keeps rising. We need to not only maintain momentum but push further, Finkel said.
According to Finkel, we may or may not achieve 82% renewables by 2030.
“Yet, looking ahead to 2035, this doesn’t matter so much. What matters is that the direction is clear, that we accelerate towards 2030 and keep going.”
We need a hike in demand to achieve anything close to a Paris-aligned pathway to 2035, Finkel said.
Four important messages emerge from the McKinsey modelling.
1. Electrification is a key driver for emissions reduction beyond 2030
The required increase in demand by sector, measured by TWh p.a., is:
“Ambitious yet achievable emissions reductions to 2035 would result in 50% increase in electricity demand,” Finkel said.
“If we can increase demand to this degree, we can deliver a similar level of renewables at much lower cost and indeed can get up to 90% level or higher, at same or lower cost than if we can’t address the constraints.”
2. Gas remains an important part of transmission
Looking at both winter peak day gas generation and industrial uses, gas will remain essential particularly for longer duration and seasonal storage.
The real challenge here is the rising demand for gas in the southeastern states. Industrial gas use could also increase during the transition to green iron.
3. $200 billion in energy sector capital investment is required by 2035
This kind of significant capital outlay can still be a cost-effective way to achieve decarbonisation goals, McKinsey noted. Modelling using current costs for hyperflexible use case, across industries, suggests power delivery would be around $80 to $120 per MW hour.
“That level of firming brings prices down below the extremely high peaks we’ve seen in the last few years. But it will never bring us back to the cost of fully depreciated brown coal assets.”
4. Green growth opportunity relies on delivering low-cost clean energy
Heading to 2035, Australia’s potential to become a global energy superpower is “absolutely real”, Finkel said. Yet it depends on our ability to deliver low-cost renewable electricity.
He sees green iron as Australia’s biggest and most exciting opportunity. We can produce and export it to countries like Japan and Korea, both facing significant constraints on production.
We risk landing at the higher end of the cost curve, factoring in operations, hydrogen, capital costs, margin, logistics and final iron to steel conversion. McKinsey sets the projected final cost of steel production at $850 to $900 per tonne.
Finkel said the electricity sector has a big role to play in bringing costs down.
An accelerated build rate is required to unlock a lower emissions grid by 2035. The wind build rate, for instance, needs to leap from its historic peak of 1.8GW p.a. to 4GW p.a.
This is a challenge on several fronts, due to overruns on time and costs, global competition and skill shortages. The good news is, project costs can be cut by 10%, 20%, or even 25%, saving $20 to $70 billion dollars across the whole system, according to Finkel.
He suggests moving away from arms-length fixed price contracts to a more engaged, agile and hands-on role for owners and developers.
Innovative technologies should be delivered when and where they mature, with as much transmission as possible squeezed out of the existing system. Multiple energy options are needed.
Responsibility for this lies with both government and industry. It requires broadening community buy-in, and making consumers aware of the benefits for them. In Denmark, for instance, more than 20% of energy projects are community owned.
Long-term market structures are needed to inspire investor confidence in renewables beyond 2030.
Finkel believes the next two to three years are critical. We need to do more of the things we are doing to speed up and deliver projects at the lowest possible cost.